Rundel v. Commissioner

*1019 The respondent determined a deficiency in income tax for the year 1925 in the amount of $483.98. The question for decision is whether the petitioner, having reported income according to the installment method, may now report the sale of real estate as a deferred payment sale not on the installment plan. The facts were stipulated. In addition to stipulated facts, which we have adopted as our findings, the parties stipulated that, in the event the Board sustains the petitioner, the third mortgage referred to in the findings shall be deemed to have no market value.

FINDINGS OF FACT.

During the early part of 1925 petitioner purchased a frame apartment house located in Tampa, Fla., for the sum of $25,000, said consideration being represented by $5,000 cash, the assumption by petitioner of first mortgage notes of $11,000, and the execution*1751 by petitioner of second mortgage notes in the amount of $9,000.

Later in 1925 petitioner sold the aforesaid property for $67,500, receiving $12,500 in cash, the vendee assuming the first and second mortgage notes in the amount of $11,000 and $9,000, respectively, and giving to petitioner third mortgage notes to cover the balance of the purchase price, to wit, $35,000.

The cost of improvements, abstract and recording fees paid by petitioner in connection with the aforesaid sale amounted to $232.60. Depreciation sustained on the property and allowed as a deduction to the petitioner amounted to $140.

In his return for the year 1925 petitioner computed the profit realized from the aforesaid sale on the installment plan, filed his return on the installment plan, and reported a profit of $7,837.50, said profit being determined by computing a percentage on the basis of the ratio of gross profit to be realized to selling price, and applying such percentage to the initial payment of $12,500. mandatory, but only at his election was the method to be used. respondent computed the profit realized in the taxable year by taking the ratio of gross profit to be realized to the gross contract*1752 price, in accordance with the provisions of section 212(d) of the Revenue Act of 1926.

*1020 Under the contract of sale between petitioner and the vendee of the said property the gross profit to be realized by petitioner is $42,407.40.

OPINION.

ARUNDELL: Petitioner having reported income from the sale of property according to the installment method, now asks that he be permitted to have his income from the sale determined upon the deferred payment basis.

It is clear from the stipulation filed by the parties, which has been made the basis of our findings of fact, that the petitioner did in fact make a profit in the sale of certain property in the year 1925. The law under which his return was filed permitted, at his option, reporting the profit on the installment basis. This method was not mandatory, but only at his electionwas the method to be used. Presumably at the time the return was made it promised him the most satisfactory way of reporting and paying his tax. Subsequent events or a change of mind now make petitioner's choice of the installment basis not to his liking, and so he seeks another method which it is claimed will produce a lower tax.

*1753 It has been held, however, in a number of cases that the filing of a return of income according to one of two alternative methods recognized by statute constitutes a binding election and the taxpayer may not thereafter report on another basis. See ; affd., per curiam,; ; ; ; . In the Gilbert W. Lee case the taxpayer computed income on what was in effect the installment method and filed his returns accordingly. We said in that case:

It is apparent, therefore, that the petitioner elected to return the income resulting from the sale of lots on the installment basis. This choice must have been considered and doubtless was made because it was deemed to best serve the interests of the petitioner. Having once made his election, the petitioner should not be allowed to change to a different basis merely because subsequent legislation or other events made it to his interest so to do.

*1754 Our decision in that case was affirmed by the Circuit Court of Appeals for the Sixth Circuit. In James C. Ellis et al., a partnership of which petitioners were members filed a return for the first year of its existence on the completed contract basis, and as the one *1021 contract that it had was not completed in that year, the partners reported no income from the partnership. After completion of the contract one of the partners filed an amended return in which he allocated income to the first year of the partnership's existence. We sustained the respondent's refusal to accept the amended return, saying in part:

It is clear from the record that the partnership in its original return for 1920 elected to stand squarely on the completed contract basis, and, none of the partners having returned any amount and income from the partnership in 1920, it may be assumed that they also elected to report the profit from the contract on that basis.

* * *

It seems to us that the petitioners, having elected to report on the basis of a completed contract, should not now be heard to complain because the respondent refuses to permit them to change to another basis. *1755 There is little, if any, difference between the situation here and that of a husband and wife electing to file joint or separate returns. In those cases we have held that where the election has been made it is binding. ; ; ; ; ; .

In the case of , decided this day, we reached the conclusion, under the peculiar facts there present, that the installment method did not serve to reflect the true income of the taxpayer, and permitted a change of the basis of reporting. The transaction out of which arose the profit sought to be taxed in that case was one wherein it was established that the second mortgage which was given by the purchaser to cover a large part of the anticipated profit was worthless within the year of sale, and that no part thereof would ever be recovered by the vendor. Under the facts in that case the figure obtained by including the second mortgage*1756 at face value was a gross overstatement of the profit to be realized, and the installment method of computing income was not applicable.

The stipulation referred to in our preliminary statement with regard to the third mortgage read as follows:

It is further agreed and stipulated that if the decision of the Board holds that petitioner may change from the installment plan to the deferred payment basis, then, and in that event only, the third mortgage of $35,000 shall be deemed to have no fair market value.

In view of the language of the stipulation we must assume that, considering the case on the installment basis, the mortgage had some value. There is no evidence to indicate that the intrinsic value was any less than the face amount of the mortgage, and as he installment basis contemplates taking into consideration "income to be realized" as well as realized income, we can not say that the mortgage should be accounted for at any figure less than $53,000.

*1022 Accordingly, the facts which prompted allowing a change of method in *1757 Key Largo Shores Properties, Inc., Supra, are not present here. It has not been shown that the installment basis does not correctly reflect income and the case falls within the decisions in Gilbert W. Lee, James C. Ellis, and similar cases cited above.

Reviewed by the Board.

Dicision will be entered for the respondent.

MURDOCK concurs in the result only.